Jan. 13 (Bloomberg) -- Curbing speculation in raw materials
including oil, gold and wheat has touched off a battle at the
top U.S. commodities regulator with a legal deadline to rein in
traders just four days away.

The Commodity Futures Trading Commission is divided over
how to meet the requirements of the Dodd-Frank financial
overhaul that became law last year. A lack of data on the $583
trillion global over-the-counter derivatives market has
complicated the agency’s efforts to limit speculation this
month, as directed by the law.

“Much of the pressure to immediately implement position
limits/’position points’ comes from those who advocate the need
for price controls,” O’Malia, a Republican, said in a
statement. “It is not the role of the commission to control
prices.”

The CFTC today voted 4-1 to propose rules that would limit
the number of contracts a single firm can hold. The public has
60 days to critique the caps. O’Malia said he’s “very
skeptical” about the proposal, though he voted to put it out
for comment. No date is for a final vote on the rules.

Legal Directive

The Dodd-Frank Act gave the CFTC until Jan. 17 to curb
speculation in the energy and metals markets and until April in
agricultural commodities. Last month, Gensler, a Democrat, said
the commission wouldn’t meet the deadline because it doesn’t yet
have sufficient data. The commission delayed a vote on the
proposal at a Dec. 16 public meeting.

Today he responded to O’Malia’s statement, disputing the
notion that he and Chilton, also a Democrat, were trying to
regulate prices.

“The CFTC does not set or regulate prices,” Gensler said
in a statement. “Rather, the commission is directed to ensure
that commodity markets are fair and orderly to protect the
American public.”

More Data

He said gathering additional information will help the
commission understand the role of large traders in the market
and how proposed limits may affect them. “These levels, or
points, are the positions at which CFTC staff will brief the
commission under its existing authority,” he said.

The plan under discussion would limit traders to 25 percent
of deliverable supply in the contract nearest to expiration,
followed by an all-month ceiling of 10 percent of open interest
up to the first 25,000 contracts and 2.5 percent thereafter.

Chilton said the commission “should have proposed much
earlier in a way that would have implemented the provision as
Congress intended. That’s not happening.”

Regulators and lawmakers are attempting to rein in
commodity speculation amid concern that investors contributed to
oil reaching the record high of $147.27 a barrel in 2008. The
CFTC received hundreds of public comments on position limits and
held at least 75 meetings on the subject since July, according
to its website.

“I do not believe that the absence of position limits has
had any impact on prices in the past,” O’Malia said. “And I do
not believe that setting them now will be effective in
preventing a barrel of oil from going over $100 per barrel.”

CFTC Oversight

The financial overhaul expanded the CFTC’s authority to the
over-the-counter derivatives market for the first time since
swaps were introduced 30 years ago. Before the law passed,
traders could buy futures on regulated exchanges or they could
privately negotiate for unregulated, look-alike contracts.

The commission in October proposed a rule to gather
information on the previously unregulated swaps. The 60-day
public comment period closed in December, and the agency hasn’t
approved the rule.

Without that data, the agency can’t impose or enforce
aggregate position limits across exchange-traded futures and
economically equivalent derivatives, Gensler said last month.

The CFTC limits would impose a uniform set of rules across
exchanges and the over-the-counter market, replacing a patchwork
of inconsistent restrictions for different venues and
commodities. Trading in some agricultural contracts is already
capped, while there are few controls on speculation in energy
and precious metals.

Dunn Skepticism

“To date, CFTC staff has been unable to find any reliable
economic analysis to support either the contention that
excessive speculation is affecting the markets we regulate, or
that position limits will prevent excessive speculation,” said
Commissioner Michael Dunn.

At the Dec. 16 meeting, Gensler directed commission staff
to gather information on the derivatives positions of any trader
that exceeded 10 percent of open interest in exchange-traded
futures or similarly regulated contracts up to 25,000 contracts,
and 2.5 percent thereafter.

Commissioner Jill Sommers, who cast the only vote against
publishing the proposal, said the commission should wait for a
complete analysis of the swaps market before moving ahead on
limits.

Chilton Plan

Chilton’s proposal is similar to accountability levels now
policed by regulated exchanges like the New York Mercantile
Exchange and the Chicago Board of Trade. Traders that exceed
those levels may come under increased scrutiny, and be asked to
freeze or reduce their bets. The exchanges also impose
restrictions in the last few days before a contract expires.

O’Malia said those actions will create uncertainty about
limits, chase traders off of the transparent exchanges and open
the CFTC up to legal challenge because the public wasn’t given
proper notice or opportunity to comment.

The financial overhaul, named for its primary authors,
Democratic former Senator Christopher Dodd of Connecticut and
Congressman Barney Frank of Massachusetts, aims to stem systemic
risk by requiring most interest-rate, credit-default and other
swaps be processed by clearinghouses after being traded on
exchanges or swap-execution facilities.